Has The Commercial Property Cycle Peaked? Altus Believes It Might Have

Altus InSite’s fourth-quarter 2011 Investment Trends Survey suggests that the current Canadian commercial property market cycle, characterized by falling yields and higher values for all property categories, is peaking. The strengths of the Canadian market – low interest rates, a highly regulated banking system and an imposed discipline in the commercial real estate development sector – cannot safeguard it from external shocks such as Europe sovereign debt crisis, a slowdown in China and political gridlock in the USA.

“I don’t think we are going to see a major correction like in 2009 where some values dropped significantly because they were inflated right before the financial crisis,” said Marie-France Benoit, a director of Altus InSite, who is based in Quebec City. “People are more cautious in this cycle then in the cycle before the financial crisis and they may be simply taking a breather.”

Altus utilizes a basket of benchmark properties in 32 asset classes to measure the mood of market participants. In its fourth-quarter report Altus noted a “sea change” from its prior three-month survey measured by a fall in demand on the Investor Outlook barometer and a pause in the 24-month downward spiral of yield rates.

What really illustrates the slowdown for Altus however is the decline in capitalization rates. “The value for properties in general from the investment transfer have been increasing which has led to a compression of cap rates,” Benoit said.

Chart from Altus Insite's Q4 2011 Investment Trends Survey

Benoit further explained, “We see cap rates in the survey going down significantly from one quarter to the next, that translates into confidence coming back”. “We see that this trend is slowing down so that people are becoming more cautious but I don’t think we have reached the stage of people are becoming pessimistic. There are a lot of unknowns in the economy and there has been a lot of investment in the last year.”

Comparing Overall Cap Rates (OCR) for different types of assets in the hub cities across Canada, found significant compression over 2011 with the largest downward shift being 40 to 60 bps for Downtown Class “AA” Office and Suburban Multiple Unit Residential, followed by Single Tenant Industrial which declined 20 to 40 bps and Tier l Regional Mall down by 20 to 30 bps.

In the fourth quarter, however, an across the board slowdown has been identified by Altus with 47% of product/locations showing “no change” in OCR since last quarter. The western locations were more bullish overall.

In summary, Investment Trends Survey for the fourth-quarter of 2011 recorded a shift by survey respondents to a more cautious attitude to value trends for most product types. While most respondents predict stability in values, the shift could signal a market peak, or merely a “breather” by investors.

Click here to download the Altus InSite’s fourth-quarter 2011 Investment Trends Survey (PDF)



Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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